Iran’s Energy Sector Needs Sanctions Relief and Foreign Investment

The Russian invasion of Ukraine, and the subsequent energy crisis it unleashed, have highlighted the potential positive effects of a possible nuclear deal with Iran in the global energy market. Although the negotiations between Iran and the “P5+1” nations in Vienna have stalled, Iranian officials have highlighted Iran’s full return to global oil markets as one way to resolve the ongoing energy crisis, and help Europe’s energy security. On the other hand, Iranian officials seem in no hurry to lift sanctions, in part due to the country’s sudden windfall as oil prices have gone up, although these crude oil exports remain handicapped by international sanctions.

When it comes to Iranian nuclear talks, Qatar has always played a major role. Speaking at a press conference in Germany, Qatari Emir Sheikh Tamim expressed with confidence “that there will be an agreement between the parties of the nuclear deal, and Qatar is ready to participate in resolving this dispute.” Qatar’s spokesman for foreign affairs, Majed Mohammad Al Ansari, added that the country was expecting progress on the Iranian nuclear issue and expects to see “peace and stability in the Gulf region.”

Gas Deals

With oil crossing $100 per barrel – nearly twice the prices last year – Iran could see major economic benefits from an end to sanctions. Commodities analysis firm Kpler reported that Iran has increased refined fuel and oil exports to 870,00 bpd in the first quarter of this year, an increase of almost one-third compared to its previous levels. The past month has also seen the announcement of a China-Iran military cooperation deal, along with a long-term food supply deal between Iran and Russia. If Iran is to return to Vienna, it would be only to finalize its accord with the P5+1.However, this  does not seem probable given the ongoing disputes over the classification of the Islamic Revolutionary Guard Corps (IRGC) and other contentious political issues.

During the JCPOA era, the Iran-Oman pipeline project was raised again. Given the potential of Muscat’s LNG facilities, Tehran voiced its willingness to use the Omani LNG facilities to become an LNG exporter. According to a memorandum signed at the time, Iran agreed to transport natural gas to Oman via a pipeline; once in the Omani facility, the natural gas would be cooled and compressed into LNG and subsequently exported to Europe. Mehran Amir Moeini, Deputy International Director of Marketing and Gas Operations of the National Iranian Oil Company, announced in March 2021 that Iran sought to deliver 2 billion cubic meters of gas a year to Omani refineries for the purpose of exporting as LNG. An additional 8 billion cubic meters of gas will be delivered to meet Oman’s domestic consumption needs.

Should a new JCPOA be signed and sanctions against Iran cease, Iran would find itself in the position of being able to export large amounts of oil, which push down the global cost per barrel both in the short run and the long run.  Independent of other issues, Iran is a reliable source of oil and holds around 157 billion barrels— ten percent of global reserves, or 13 percent of the combined reserves of all OPEC countries. In spite of Iran’s vast oil wealth, the lack of progress in nuclear talks between Tehran and their global players has caused a delay in the nation’s return to the world market.

Newfound Competition

Iranian oil sales have also faced newfound competition from Russia. The latter has faced even harsher sanctions than Iran in the aftermath of its invasion of Ukraine on February 24. Prior to the self-described “special military operation,” Iran largely catered to the Chinese market, while most of Russia’s exports went to the European Union. After the EU implemented its sanctions on Russia, however, Moscow drastically ramped up its sales to China, totaling more than $7.5 billion since February. According to experts, this has led China to reduce its oil imports from Iran and request lower prices. Russia’s oil is cheaper to transport to China and is of a higher grade than Iranian oil. Simultaneously, Washington continues to sanction any entity that trades with Iran, complicating its ability to export.

There is no doubt that Iran’s return to the energy market after the lifting of sanctions will cause relative fluctuations in the market. Given that Iranian oil is already on the market to some extent, one should not expect that a new possible agreement and Iran’s return to the market – free of sanctions –  will cause a tremendous shock. Over the next few years, Iran will need to invest billions of dollars in its energy industry to both maintain, and increase, its current production capacity. Otherwise, it risks becoming an energy importer. Similarly, if the Iranian gas pipeline to Oman is built, Iran can become an LNG exporter by using the Omani LNG facility. Before this can happen, however, Iran’s natural gas production capacity must be increased, to meet the country’s domestic demand and increase its export capacity.

The global politics of energy can provide political impetus to revive the nuclear deal sooner, but Iran must also provide the necessary conditions for raising capital and technology. Without foreign financial resources and technology, Iran cannot play an important role in global energy markets. Unfortunately, attracting foreign financial resources will require a redefining of Iran’s foreign policy and energy diplomacy—concessions that Tehran appears reluctant to make. The high rate of domestic consumption of natural gas should also be managed, and Iran’s energy infrastructure should be repaired. These tasks will be difficult, but the alternative is worse; without the approval of the Financial Action Task Force (FATF) and with the lifting of sanctions, Iran will certainly be unable to attract the resources it needs. With a deal, even a barebones one that leaves some issues unresolved, Tehran can finally begin to make progress toward a brighter future.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.